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CHURNING

Many advisers are compensated when a customer makes a transaction based on their recommendation. Churning is the practice of making transactions that are excessive in size or frequency, with the intention of generating higher commissions. When determining if an account has been churned, regulators will look at the frequency of the transactions, the size of the transactions, and the amount of commission earned by the representative. Customer profitability is not an issue when determining if an account has been churned.

In addition to churning where the agent or firm executes too many transactions to increase revenue, a practice known as reverse churning is also a violation. Reverse churning is the practice of placing inactive accounts or accounts that do not trade frequently into fee based programs that charge an annual fee based on the assets in the account. This fee covers all advice and execution charges. Since these inactive accounts do not trade frequently it will cause the total fees charged to the account to increase and makes a fee based account unsuitable for inactive accounts and for accounts that simply buy and hold securities for a long period of time. These accounts will generally be charged an annual fee in the range of 1-2 percent of the total value of the assets in lieu of commissions when orders are executed.

MANIPULATIVE AND DECEPTIVE DEVICES

It is a violation for an adviser to engage in or employ any artifice or scheme that is designed to gain an unfair advantage over another party. Some examples of manipulative or deceptive devices are:

• Capping . Pegging

• Front running

• Trading ahead

• Painting the tape/matched purchases/matched sales

Capping: A manipulative act designed to keep a stock price from rising or to keep the price down.

Pegging: A manipulative act designed to keep a stock price up or to keep the price from falling.

Front running: The entering of an order for the account of an agent or firm prior to the entering of a large customer order. The firm or agent is using the customer's order to profit on the order it has entered for its own account.

Trading ahead: The entering of an order for a security based on the prior knowledge of a soon to be released research report.

Painting the tape: Is a manipulative act by two or more parties designed to create false activity in the security without any beneficial change in ownership. The increased activity is used to attract new buyers.

 
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